The headlines about historically low mortgage rates might lead you to believe that refinancing is the right move for you – and it might be.
Generally, a mortgage refinance is a good idea if it will save you money, although there are a few things to consider first. Let’s take a look at 10 reasons to refinance today.
1. Secure a lower interest rate
One of the top reasons to refinance is to lower the interest rate on your existing loan. The rule of thumb is that if mortgage rates are lower than your current rate by 1% or more, it’s a good time to refinance.
By reducing your interest rate, you can increase your long-term net worth and short-term cash flow.
2. Lower your monthly mortgage payment
Struggling to make your mortgage payments? You can refinance to lower your monthly payment by securing a lower interest rate, eliminating private mortgage insurance (PMI), and/or refinancing to a longer-term loan.
A shorter loan term can help you qualify for a lower rate, but it will lead to a higher monthly payment. A longer-term loan can lower your monthly payments, but it will result in paying more interest overall.
3. Eliminate PMI
If you bought a home with less than 20% down, you were required to pay PMI. You can refinance to eliminate PMI if your new mortgage balance is below 80% of the home’s original value.
If you refinance to lower your interest rate and eliminate PMI, it’s a double dose of savings.
4. Get cash out
A cash-out refinance is a type of mortgage refinance that allows you to take advantage of the equity you’ve built up in your home.
Equity is the difference between what you owe on your mortgage and what your home is currently worth. You gain equity when your home increases in value or when you pay down your mortgage principal through your monthly mortgage payments.
With a cash-out refinance, your current mortgage is replaced with a larger loan and the difference will go back to you in cash. While you can use the money from a cash-out refinance for any purpose, most homeowners use it for high-interest debt consolidation, home improvements, investment purposes, or to cover college expenses.
5. Consolidate debt
Debt consolidation is the act of using one loan to pay off multiple loans or credit cards to simplify your debt repayment. Multiple debts are combined into a single, larger debt or loan, with one interest rate and one monthly payment.
If you have debts with high interest rates, you can consolidate debt at a substantially lower interest rate, saving yourself money each month.
6. Tap equity for home improvements
You can use the value of your home to further increase its value with home improvements. Home improvements that add value, prolong the property’s life, or adapt the home to new uses are called capital improvements.
Common home improvements that qualify as capital improvements include installing a swimming pool, building a fence to enclose the yard, adding additional bedrooms, fixing or replacing the roof, adding insulation, installing storm windows, and installing central air or an HVAC system.
You may be eligible for certain tax deductions and benefits with capital improvements. Before starting, ensure that your home projects qualify.
7. Cash-out refinance for investment purposes
Equity from your primary residence can be a great way to buy a vacation home or investment property. With a cash-out refinance, you can use the cash from your home equity to cover the down payment on your next home purchase.
One of the most popular ways to generate passive income is through rental properties. Rental properties are powerful wealth builders as they typically appreciate in value over time, harness the power of debt leverage, and provide monthly income. By utilizing your home equity, you can build long-term wealth with real estate.
8. Shorten your loan term
We discussed refinancing to a longer-term loan to reduce your monthly mortgage payment, but you can also refinance to a shorter-term loan.
The benefits of refinancing to a shorter-term loan include building home equity faster, paying less interest over the loan’s lifetime, and having a lower interest rate compared to a longer-term loan. However, while you’ll pay less interest overall, you will have a higher mortgage payment and less wiggle room in your monthly budget.
Before refinancing to a shorter-term loan, first ask yourself these questions: Can I afford a higher mortgage payment? Will I be able to meet my other financial goals? Can I pay off my loan faster another way?
9. Switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
There are two primary mortgage types – fixed-rate mortgages and adjustable-rate mortgages (ARMs).
A fixed-rate mortgage charges a set interest rate that remains constant throughout the life of the loan. The main benefit of a fixed-rate loan is that you are protected from fluctuating interest rates and potentially significant increases in monthly mortgage payments.
An adjustable-rate mortgage is a home loan with an interest rate that changes throughout the life of the loan. The main benefit of an ARM is that it is considerably cheaper than a fixed-rate mortgage with low initial payments. In a falling-interest environment, you can enjoy lower interest rates and lower monthly payments. However, you could be in trouble when interest rates rise.
When choosing a mortgage, you must consider a wide range of factors and balance them with the economic realities of a dynamic marketplace.
10. Your life and financial situation(s) have changed
Whether it’s divorce or just wanting to have the mortgage in one person’s name, you might consider refinancing to take a name off a mortgage.
Whatever the situation, you’ll need to resubmit paperwork to prove that you have strong enough credit history and monthly income to make mortgage payments on your own.
In terms of changing financial situations, refinancing can be an excellent option if your credit score has improved since you applied for the original loan. Borrowers with low credit scores are generally given mortgages with less-than-ideal rates and terms.
Refinancing can be a powerful financial move if it reduces your mortgage payment, shortens your loan term, helps you build equity faster, or helps you to achieve your financial goals.
With today’s historically low mortgage rates and record-high equity gains, refinancing could save you money in the short and long term. However, you should only refinance if and when it makes financial sense for you to do so.
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